- Ship managers: beware of cyber threats
Digitalisation of shipping and the associated cyber risk vulnerabilities are hotly-debated and discussed topics in the shipping industry, both at state and corporate levels. Whilst the focus appears to be largely on shipowners and the use of autonomous ships, there are also a number of pressing areas of concern that ought to be considered and addressed in the context of ship management.
The industry standard BIMCO SHIPMAN contract allows the owners to delegate all or some aspects of managing their fleets to ship management companies. These areas include technical, crew and commercial management of operations. Each of these areas brings its own challenges and risks as regards the implementation and use of technology.
Commercial and technical management
Under these headings, ship managers assume responsibility for ensuring that ships are compliant with all relevant standards and regulations, are sufficiently supplied, and engaged in commercial employment.
As an agent, a ship manager will often act as an intermediary. This creates obvious potential for cyber criminals who may seek to embed themselves in a transaction and attempt to have funds payable for genuine supplies diverted to their own bank account.
The hacker could send a fake invoice and delivery note to the ship manager and request payment for the bunkers into the hacker’s own bank account
For instance, a ship manager orders bunkers for a ship. Having penetrated the ship manager’s IT systems, a hacker could monitor all email exchanges with the bunker supplier. Once the price has been agreed and instructions to deliver issued, the hacker could send a fake invoice and delivery note to the ship manager and request payment for the bunkers into the hacker’s own bank account.
By the time the loss is discovered, the transaction would likely have been made and the funds dissipated from the hacker’s account. Contractually, the owner would probably be obliged to pay the bunker supplier for the bunkers in fact supplied. The owner could then turn to the ship manager to recover its loss of the first payment pocketed by the hacker.
A question would then have to be answered as to whether the ship manager acted in a professional manner and had sound systems in place to prevent the cyber fraud from happening. If the ship manager’s approach to IT security was reckless, the ship manager could be liable for the full amount to the owner.
In that situation, the ship manager might have three ways to recoup the money, namely:
1. Against the hacker – but in our experience it will be very difficult and expensive, once the money has gone, to recover anything. Many countries operate specialist cyber-crime police divisions. A consideration should be given to making a prompt notification (this could also be required under any specialist insurance policy and/or local law);
2. Against its IT suppliers, depending on the terms of that contract and the nature of the fraud that has resulted in the loss; and
3. Against its insurers, if a specialist cyber risks policy has been purchased.
A ship can only be as resilient as its crew. Depending on their objectives, many hackers will either seek to use crew as their gateway to the ship’s systems or simply target individual seafarers in an effort to extort money from them, raising an important welfare consideration.
There have already been reported instances of seafarers being profiled and targeted on social media (such as online dating portals or interest groups). Seafarers could then be contacted and unknowingly used to carry malicious software on-board a ship (e.g. on a USB drive) or even, in some cases, be blackmailed into assisting the hackers or asked to pay a ransom.
Whilst a significant proportion of the exposure may ultimately lie on the employer, i.e. the owner, ship managers will store a lot of personal data about seafarers and could be targeted by cyber-criminals looking for copies of bank account details, medical records etc. to help them profile individuals.
The GDPR will come into force in the EU (including the UK) in May 2018. Depending on whether the ship manager is based in the EU or the crew concerned comes from an EU country, a breach resulting in personal data being obtained by hackers will need to be reported to the relevant local authorities. If the ship manager is unable to demonstrate compliance with the GDPR and that the data was sufficiently protected, the maximum fine which could be imposed by the authorities could be the higher of EUR 20 million or 4% of global annual turnover.
Ship managers contracting on the SHIPMAN form have a general duty to “use their best endeavours” to provide ship management services to owners (see clause 8(a)). The increased reliance on technology brings increased risk of being targeted by cyber criminals. We consider it prudent that ship managers carefully analyse their IT infrastructures and policies, and implement appropriate measures to fully comply with their contractual obligations under the SHIPMAN form.
Many IT supply contracts will have more robust and up to date force majeure clauses potentially excluding some types of cyber-attacks. Under the un-amended SHIPMAN form, a profit-motivated attack would be unlikely to fall within the definition of force majeure (clause 17(a)) creating a potential for liability without any corresponding recourse against IT suppliers. It is advisable to consider the potential contractual gaps and take advice on appropriate insurance products.
Ted Graham and Adam Swierczewski are Partner and Associate respectively at law firm Ince & Co. To contact Ted, telephone +44 (0) 20 7481 0010 or email email@example.com. To contact Adam, telephone +44 (0) 207 481 0010 or email firstname.lastname@example.org.
- Member update
The following individuals have applied for membership of an existing member company.
INDIVIDUAL COMPANY Mr A Kokkinis Clarksons Platou Mr M Vidalis Clarksons Platou Mr K Fischer MJLF & Associates Mr A P Naik Clarksons Platou Mr S Papachristos Clarksons Platou Mr H Synnes Western Bulk Chartering AS
Any comments should be passed to Karen Karanicholas by 28 February 2018.
- Finance: the next industry battleground
A decade after the crisis in the shipping industry started, it seems that the market now is slowly moving to a favourable equilibrium, with the worst behind us. Freight rates have stabilised and hover in positive territory, while the outstanding orderbook is low-to-manageable in most asset classes in shipping. With the hope that there will be no rushed stampedes in any direction, the next few years look, at the very least, stable for an industry still in pain.
While supply and demand for ships slowly seems to have found its natural path, there is still a major concern in respect to shipping finance. In short, there is a notable dearth of financing available for this capital-intensive industry, and, to the extent that capital is available, the cost of obtaining it has moved to significantly-high levels, as compared to the financing-costs of the last decade and also in respect to what a still-weak industry can afford.
For starters, private equity funds and institutional investors have effectively lost any interest in shipping. Many of these funds were “sucked” into investing in newbuildings in 2013 in the hope of a pre-mature market recovery and they ended up losing billions of dollars. Not only was the timing wrong, but many mistakes were made in terms of operations, strategy, execution and sharing risk. At this stage, there is minimal interest in investment in shipping, unless there is a special “angle” to it, preferably involving cargo-movement. And equity investors in the public markets, where the best of the shipping companies are listed, still do not see a “catalyst” in order to invest.
The other major leg of the shipping financing-stool — that is, shipping banks — also stands anaemic and unable to support the industry. Several major shipping banks have already stopped lending in the shipping industry (i.e. RBS, Lloyds TSB, etc.), while a great deal more shipping banks have limited their activities to a handful of clients. Despite the low-interest-rate-environment in the last few years, shipping banks could not live with the risk embedded in the shipping industry and preferred to have huge cash reserves rather than lend in a risky shipping industry. Additionally, the regulatory environment has not really been helpful to shipping banks, as ship mortgages are asset-backed loans (as compared to corporate loans), and thus costly for the bank in terms of capital they have to keep in reserve. Accordingly, for most of the shipping banks and the average shipowner, only a handful of lending takes place.
Shipping finance is the “bottleneck” at present in shipping as it’s a dislocation in the market
On the other hand, for a few big shipowners who have critical mass and have been proactive enough to build their balance sheet to be attractive to the banks, they have been taking the lion’s share of the shipping loans available. In short, in a rather-subdued shipping-lending market, a handful of big shipowners are getting for themselves the crashing majority of the liquidity available — and that at extremely competitive terms (i.e. L+200 basis points or even less) — while the vast majority of shipowners remain undesired by the banks. It’s clear that the trend is towards a market where “the big get bigger” and the smaller owners have to fend for themselves.
And how to get financing in a market that has little respect for the smaller shipowners?
Several credit funds and alternative capital funds have been set in the US and the UK that aim at filling the funding gap in the shipping industry. At a price. Several of these funds lend (or provide leasing) at 8% interest or more, whether expressed in absolute numbers or in terms of spread over Libor. In quantitative terms, for every $10m borrowed, just the daily interest payment alone is $2,300, and this is on top of operating expenses and amortisation of the loan. There is great demand for such financing, given the lack of alternative options, and indeed, it’s high-cost financing. There are already a few shipowners who are buckling under such a usurious debt burden and already sweating to save their vessels from arrest. Such is the state of the market.
Of course, there is still Japanese and Chinese leasing, and to a certain extent, the Norwegian bond market — all of which have been rather active, and at rather competitive terms and cost of capital (ranging from 4% to 8%). But again, these venues for shipping finance are available only to shipowners who have certain critical mass (at least twenty vessels, etc.) and a viable business plan to support.
Shipping finance is the “bottleneck” at present in shipping as it’s a dislocation in the market. On the bright side of things, lack of shipping finance has been one of the reasons that the outstanding orderbook has been coming down, leading to a more-balanced market. And lack of cheap shipping finance has taken lots of speculation out of the market. No one can be displeased with these “side-effects” — unless, of course, one is a shipbuilder or a speculator betting that ships’ prices will strongly appreciate.
Looking forward, shipping finance is likely to be the new battleground of the shipping industry. Shipping is a capital-intensive industry, and having a competitively-financed fleet will always be a differentiating factor for successful shipowners. We deem credit funds and alternative capital to only be a very opportunistic source of financing in the short-term next few years, and never really a strategic, long-term partner to the industry. Attempting to buy ships and build a fleet with 8% or more cost of debt at the prevailing terms is an accident waiting to happen (we are not necessarily arguing that a risky industry such as shipping is entitled to much-cheaper debt-financing, but now the cost and prevailing terms is a compact with the devil, in our opinion).
One thing is clear: shipping finance is a sieve separating the chaff from the wheat. Shipowning seems to be moving to an “institutionalised” state where big shipowners will get to access competitively-priced capital and grow while smaller shipowners will have strategic decisions to make. It does not seem that shipping finance is a transient problem for one to wait out. Active planning and a solid strategy is required for one to succeed, working with the right partners and advisors.
Basil M Karatzas is the founder and chief executive of Karatzas Marine Advisors & Co, a ship-brokerage and shipping finance firm based in Manhattan, New York. Karatzas Marine Advisors is a member of The Baltic Exchange. For more info, please visit www.karatzas.com.